China's Great Wall of Debt by Dinny McMahon

Author:Dinny McMahon
Language: eng
Format: epub
Publisher: Houghton Mifflin Harcourt

The result is asset bubbles throughout the economy. According to Liu, within a few years of his first auction, there were suddenly one hundred auction houses throughout China—“at least one or two in every city”—selling vintage baijiu. In response to the competition, Liu looked into diversifying, and for a time considered listing ten thousand bottles of old Fenjiu—a type of baijiu from Shanxi Province—on an electronic exchange in a way that would allow people to trade them like shares. He got the idea after witnessing the price of old coins trading on an exchange in southern China increase more than ten times over.

Such fringe markets have proliferated in China since the 2009 stimulus, which was launched in response to the global financial crisis, first supercharged the money supply. Hundreds of electronic exchanges have appeared across the landscape, creating forums for people to trade almost anything imaginable, from the ingredients of traditional Chinese medicine to vats of prebottled baijiu. Some trade niche commodities, like the Fanya Metals Exchange. For a time, an exchange in Tianjin sold art securities—people could buy shares in a couple of Chinese landscape paintings—that went up in value by more than 1,000% in just a couple of months before the authorities took an interest and the bubble popped.

But while the flood of money has breathed life into new markets, it has also wreaked havoc in more-established markets. It pumped up the stock market by 150% in less than a year before the bubble popped in mid-2015, wiping out—on paper at least—about $3 trillion worth of wealth. It has played a role in inflating land prices in China’s major cities to nosebleed heights, and did the same to bond prices in 2016 and early 2017, the opposite of what bonds should be doing in a slowing economy with rising bad loans. Even the commodities-futures market has been radically distorted by the rush of speculative cash. On one day early in 2016, the volume of rebar-steel futures traded was so disproportionate to any conceivable demand that it was enough to build the Eiffel Tower 178,000 times over. On another day, the number of cotton contracts that changed hands represented enough cotton to make one pair of jeans for every man, woman, and child on the planet. The foreign press has dubbed this mass of itinerant cash “the great ball of money.” Its dangers aren’t lost on China’s senior leaders.

“We need to thoroughly give up on the notion that we can grow the economy through monetary expansion.” So reads an interview published on the front page of the People’s Daily in mid-2016, with an anonymous source, identified only as being an “authoritative person” widely thought to be Xi Jinping’s chief economic adviser. The column called for reform before something went seriously wrong. “For every part of the financial system there exists the risk of financial contagion.”

That China could really suffer financial contagion—whereby a shock in one corner of the financial system turns into a full-blown crisis—is not the sort of alarmism the Chinese Communist Party typically advertises on the front page of its daily broadsheet.

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